*4.2.1 Financing risk*

According to **Table 15**, the financing risk will affect liquidity risk. The Granger causality test suggests that the one-directional relationship from financing risk to liquidity risk exists. It implies that this causal relationship is triggered by financing side which will affect the liquidity positively in the short run only. This situation is supported by IRF results where any shocks coming from financing side will be negatively responded by liquidity risk. The variance decomposition also informs


#### **Table 15.**

*Summary of empirical findings from various assessments.*

#### *Risk Analyses on Islamic Banks in Indonesia DOI: http://dx.doi.org/10.5772/intechopen.92245*

that there is a small contribution of risk variation from financing risk to liquidity risk. Therefore, overall findings suggest that Islamic banks are resilient in absorbing shocks when financing side is vulnerable. In other words, Islamic banks are not sensitive to risk originated from financing side as its liquidity is sound. In addition, the findings elaborate that the liquidity management on Islamic banking in Indonesia is strong and resilient against financing risk.

### *4.2.2 Liquidity risk*

risk exists if Islamic banks fail to settle operational problems, especially in the

c. There is one-directional relationship between NPF and BOPO. It means that the vulnerability in Islamic banks due to operational risk is empirically caused

operational risk is positively affected by financing risk, either short or long

In short, empirically the risks in Islamic banks are mainly caused by financing risk. The one-directional relationship implies that bank's vulnerability exists due to the inability of the bank to manage nonperforming financing. Bank's balance sheet is vulnerable toward any disruptions on financing problems. It is rational in the midst that Islamic banks have limited funds than conventional banks and offer various Islamic contracts. These conditions enable Islamic banks to face systemic risks when a problem occurs on the asset side as both sides are connected according

**Table 15** summarizes some empirical findings concerning embedded risks in Islamic banks with various assessment methods. In general, there is an interrelated risk in Islamic banks. However, based on several assessment methods, the findings suggest that only financing and operational risks have causal relationship with liquidity and

According to **Table 15**, the financing risk will affect liquidity risk. The Granger causality test suggests that the one-directional relationship from financing risk to liquidity risk exists. It implies that this causal relationship is triggered by financing side which will affect the liquidity positively in the short run only. This situation is supported by IRF results where any shocks coming from financing side will be negatively responded by liquidity risk. The variance decomposition also informs

**Operational** ! **liquidity risk Financing**

Negative, significant (lag-1 and lag-2)

Positive, not significant (lag-1)

Negative (short run) and positive (long run)

Significant Significant Significant

**risk** ! **operational risk**

Positive (lag-3)

Negative, significant (lag-1)

Positive (short and long runs)

operational risks. The details concerning these relationships are as follows:

by financing risk. This finding strengthens the previous results that

term, with a quite high degree of contribution.

to the bank's balance sheet flow process.

**Risks Financing**

IRF Negative (short and

*Summary of empirical findings from various assessments.*

**Assessment methods** VECM estimation short term

VECM estimation long term

Granger causality

*Source: Author's calculation.*

test

**Table 15.**

**70**

**risk** ! **liquidity risk**

Positive, significant (lag-1)

Negative, significant (lag-1)

long runs)

VDC 3.623686 5.852848 46.13966

long run.

*Banking and Finance*

**4.2 Analysis**

*4.2.1 Financing risk*

**Table 15** demonstrates the relationship of liquidity risk with other risks. The Granger causality test suggests that liquidity risk has a directional relationship with financing and operational risks. Given that liquidity risk is affected by other risks, generally it was affected negatively in the short run and positively in the long run, but did not show a significant sign according to VECM estimation. The IRF further explains that even though the liquidity risk gets shocks originated from financing and operational risks, Islamic banks remain resilient. The VDC results also strengthen the findings that the variation on liquidity risk is negligibly contributed by financing and operational risks. In other words, financing and operational risks do not matter for Islamic banks, especially related to liquidity side.

#### *4.2.3 Operational risk*

**Table 15** shows the general performance of operational risk on Islamic banks in Indonesia. According to the Granger causality test, operational risk exists in Islamic banks where it was influenced by financing risk and liquidity risk. The former indicates that Islamic banks are sensitive toward operational risk particularly due to failure in repayment counterparty obligations. This condition is supported by some empirical evidences including the following: (1) VECM estimation suggests that there is a positive relationship between financing and operational risks only in the short run, but not in the long run. This implies that Islamic banks have adjustment capacity to settle their operational problems when financing problems exist; (2) IRF result explains that operational risk is quite sensitive in Islamic banks as the variation in operational risk is highly contributed by financing risk according to VDC estimations. In short, operational risk in Islamic banks is connected with the ability of Islamic banks to manage their financing allocations. In other words, financing risk matters for Islamic banks.

The latter shows that liquidity risk has a directional causal relationship with liquidity risk. However, some empirical evidences suggest operational problems in Islamic bank are not closely affected by liquidity risk. For example, VECM estimation found no positive and significant influence in either short or long run and small portion variation of liquidity due to operational problems. It implies that liquidity management in Islamic banks is strong and sound in absorbing any shocks from operational risk. In other words, operational risk does not matter for Islamic banks, particularly related to liquidity side.
